Too Big to Fail, or Too Big to Manage?

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Hi and welcome to what's going on in banking. I'm

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your host Ron shovel and chief research officer at Cornerstone

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advisors a couple days ago acting controller

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of the currency Michael Sue gave a

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speech at the Brookings institution and he

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suggested that Banks whose size inhibits inhibits

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their abilities to address internal weaknesses and comply with

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regulations may need to be broken up.

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He went on to say that the negative impacts of

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too big to manage and too big to fail banks are

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immeasurable and can take years to mend.

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He proposed a four-stage framework

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for determining if a bank reached a set a

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stage for when they were quote too big to manage

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and said the design logic of an

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escalation framework is to use the threat of

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restrictions and divestitures to force Banks

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to prove that they are manageable.

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Now to help me make sense of these comments that it's impact on

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Banks and the banking industry as Rob Blackwell Chief

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content officer and head of external Affairs at

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intraify. Rob is actually host of his own

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podcast banking on interest and I'm sure many of you remember Rob

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from his days at American Banker where he was

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editor-in-chief and before that believe he

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was the Washington Chief Bureau. Hope that got that right

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Rob. Thanks a lot for joining me today. Oh my pleasure room. My pleasure.

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So Rob, what was your take on Sue's comments and

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the reality of it and what you think the impact is going

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to be on the industry. So on the one hand,

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I think it's a tremendous speech. We've never

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seen a comptroller.

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Come out of the box like that and say it really talk about two big

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demandage at all at some point. I was describing it as someone as as the

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arguably the biggest speech that the OCC and

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a controllers ever give about two big management the problem.

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I really couldn't think of another one. So on the

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one hand, it's a very strong speech as you said, he's outlining steps

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to escalate a problem and very

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much implicitly threatening to break

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up a bank if they can't solve their management problems

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or prior to that really firing management or

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getting management out the door somehow. So I I

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think it's a remarkable speech on that side of

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things. I think at the other stages what's really interesting

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is it didn't really move the ball anywhere because I'm

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not sure people are taking it

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seriously and that's because they are

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looking at examples of say Wells Fargo, which has

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obviously many on the left want to

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break up and argue should is too big to manage.

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So they're making that argument and they're saying well why haven't

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you done more and if this is this is an interesting speech that

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you're giving but you know, there was a time

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to act on this and you haven't done it. So you have this dichotomy on

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the one hand on paper. It is a remarkable speech and

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I think quite a powerful one on the other hand you just

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have on both sides of it progressives are

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unhappy with them because he isn't he isn't making any indication

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that he's gonna escalate anything with Wells and then

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even some in the industry are sort of shrugging their shoulders and

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being like, okay. I mean the fine thing that they

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don't really believe that the OCC has any intention

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of

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moving forward with any of this framework anytime soon

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Yeah, I was gonna ask you. I kind of want to parse your comments out

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a little bit. Is this really about Wells Fargo or

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are there other financial institutions and

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slash banks that are in the crosshairs of this I would argue

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it's probably more about the future than it is about Wells Fargo. So I

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I don't know if he has a specific Target in mind.

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He may not I think this is sort of

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The Wells Fargo of the future if you remember obviously Wells Fargo

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for a long time in Washington was seen

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as the poster child doing everything right? I mean they were as a

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kind of hard hard to recall back that far, but

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then they had the phony account Scandal which blew up on them

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and then when Regulators were getting into that they sort of

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uncovering all these other problems and it is now been through a

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massive change in management and it just had another

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record find but that fine with the cfpb was done

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was to fix existing problems

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that are sort of were already baked in as they

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weren't new issues. They were just issues that had been under uncovered

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during all this look so, I don't

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think that controllers Sue

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was coming out and saying this is the steps. I'm going to

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use against Wells Fargo. I don't even sure Wells Fargo took it

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that way. I think it was more like well listen, this is what's gonna

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happen. If we run into this situation again, and he

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never mentioned Wells Fargo by name I should say that Wells Fargo

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never commented on the stories here and and

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I think probably with smart to sort of stay out of it, but that's

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why you have Progressive. So unhappy at Senator Elizabeth

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Warren coming out and saying, you know, it's past

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time for you to act against Wells and you haven't done that and there's no

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indication you're going to do that and I certainly did not read this speech as

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yeah. I'm moving against Wells Fargo much more

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of I'm laying down in marker. And the next time

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we have a situation like this, we're gonna handle it

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tougher and a tougher fashion than we did

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this time around.

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Now Rob does the OCC even have the

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authority to break up a bank? Well, that's a

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really good question. And could they do it do it unilaterally one

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of the interesting things is he had a

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step before breaking up forcing devastutures and that

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step was putting growth limits on a bank and everyone's local

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look their growth limits on Wells Fargo right now and that's

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true, but they are not growth limits put in place by the OCCC. They're

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put in place by the fed. The Fed was the one who imposed that

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restriction the OCCC did not so

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The question is yes. I I think they

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do have power to do things like growth limits divestitures

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as a whole untested area and then

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we're gonna get into you know, post-dod-frank coming

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down to you know, what kind of

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shape is the bank in if the bank poses a systemic

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threat that is it failure could cause a

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domino effect that takes out a bunch of other Banks and absolutely

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I think there's there's a

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pretty good sense that Regulators have the power to force

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divestitures to prevent that it particularly

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through the living will process that gives the FDIC and the

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FED a lot of leeway. I don't know that it gives the

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OCC a lot of a lot of leeway. So what's interesting

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there is the OCC probably could do

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something but it would have to be working with other regulators and and

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that's in a case where there's a systemic threat

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if it's case like now where

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there's a one-off event or a series of one off events that

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indicates a bank is just keep stepping into it because of

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series of you know, internal control issues and the

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like

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I you know, I let's put it this way. I think that would be challenged in

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court could the OCCC do it? I don't know. I'm lawyers

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can hash that out and the courts could hash that

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out. But I think they'd have a fight on their hands. There's no doubt about that. Whereas

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in a systemic event. I think it'd be a little bit more clear

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or at least the easier for the for The

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Regulators to act in this kind of environment. I think they

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would face some serious blowback and and lawsuits.

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You know, I'm wrestling with how this

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would actually play out if they were to actually take some action,

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you know in a lot of really large financial institutions.

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There are aligned by line of business. There's banking

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there's investment institutional trading

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and so forth where it'd be easy to break them out. Especially,

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you know, you think about pre-- Jim for

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getting even the name of the regulations you remember you'll remember

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back in like late 90s early 2000s when that

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was relaxed and allow these big companies to kind of come back together and

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I'm forgetting with the name of the regulation was sorry

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about green Leach Bailey which Graham leechley, thank you very much.

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So but I'm trying to picture like what would

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actually happen here? So you're gonna tell Wells Fargo or

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some Bank of that size that they have to split up

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there banking operations. And so what are we

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going back to mid-sized Community Bank size institutions who

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are what just gonna get scooped up

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by other large financial institutions

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at some point.

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It just it doesn't it doesn't seem I

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don't see where the benefits of this are. I think you

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raise a really good point which is the devil, you know,

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we like to see the devils in the details, but it's absolutely in the details here.

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Okay. So you're gonna Force the vestigers where how does

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that work? Who's being divested who's

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buying that up? And and this is a

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little bit of the case of progressive, you know pushing for these

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kind of outcomes. I mean people then Maxine Waters has wanted Wells

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Fargo to be broken up for years, but it's not really clear what happens

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if you do that and and of course that's that's

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laying aside the the court cases that

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I said what you know would be happening. But let's assume they could

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magically wave a magic wand and make it happen exactly what

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gets cut off where that goes who's

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buying it as you say it just raises

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a whole host of other issues and again could be

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managed. Could we manage those issues could could that be

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done? Yes, is it more likely that Regulators will

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use other powers to try and force change.

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also, yes, this seems like

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a you know last resort kind

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of situation and he's

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I think it's good in a way that he's coming out and acknowledging

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too big to manage exists. I think a lot of us have seen these

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large organizations and it raises questions about that. Right?

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So he's at least acknowledging that there's a potential issue, but I

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don't think they're going to be jumping to divestiture for

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exactly the reasons you're raising and and probably will much

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prefer to use other ways to discipline the

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bank.

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Yeah, I want to go back to one of Sue's comments Rob because it it kind

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of challenged some of my thinking even not

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even at that industry level but it almost at a philosophical level.

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He said the design logic of an escalation

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framework is to use the threat of restrictions and

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divestitures to force Banks to quote prove that

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they are manageable and I looked at

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that and said well maybe the problem isn't the size of the bank.

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It's the in an effectiveness of the people managing it.

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So maybe you have to prove that you're good enough to

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manage us any company of a

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certain size. I think of that and said well gee, you know, you

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put me in Wells Fargo. I might not be I may

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not have the the regulatory issues or

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compliance failures, but no sure as

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hell. I can't manage my way out of a paper back. So I'm

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not gonna be able to manage a three trillion dollar organization. So

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is the problem the size of the institution

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or the ineffectiveness of the people managing

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it?

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Know I'm I'm not sure that that's a theoretical

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question or not or if it's a real question, but

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you see where I'm going with that. Absolutely. I think it's

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a real good question active. It's a really good question. I think you're exactly

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right. I don't know people are

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listening to it. They can't see me vigorously nodding my head when you were talking

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because that's exactly right. This seemed

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this speech seem very directed at look.

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You know, if you can't fix the problems, we

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will find managers who can so much as

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everyone's talking about divestitures because that's the headline

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issue.

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I felt like what he was really doing is trying to send a

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message to managers a big Banks. Look if you keep screwing

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up, you're gonna you're gonna be gone but before everyone rushes

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and thinks that's a threat to Wells Fargo. I don't think it is because they

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already replaced their management. They've had it replaced twice since

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he's initial things were uncovered so, you know

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and brought in and Outsider Charlie Scharf to to run

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things. So I don't think it is directed as a threat

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at him. It's definitely directed as a threat though at other

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institutions. Look if you keep having the same problem

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if we keep finding this issue over and over

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and you're you're either not taking it seriously enough in

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which case you need to go or you're trying to

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fix it and you can't in which case you need to go and we need to bring in

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people who can but yeah, I think you're you're completely on the right

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angle. This is as much or probably much more about management.

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Signaling to management of these big Banks than it is about any kind

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of we're going to we're going to go in and break up the big Banks which

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isn't happening anytime soon.

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Got it. I want to go back to one more comment. I had raised this

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at the beginning as well Sue it said that the negative impacts of quote too

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big to manage and too big to fail banks are immeasurable and

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what I thought interesting about that was he seemed to

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be lumping in too big to manage with too big

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to fail and wondering is that

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is that one in the same thing or they are they different and

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from a legal and Regulatory perspective. Does

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this have any implications? That's a

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really good question too. I guess my question. I would throw

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it back to you right would be can we conceive of a

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bank that is too big to manage but is not a bank

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that would be considered too big to fail.

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Maybe but I don't think so, you know arguably as

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an intellectual exercise. Could you separate those and

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say this Bank, you know through through its

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management system. It's just too big to manage because it's involved

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in too many different things.

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Yeah, I think it's unlikely. There's probably a very narrow slice

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of institutions in there that can theoretically fit but it but it's unlikely.

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So in a sense

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they go hand in hand. And I mean him the

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whole talking about. This is all about Regulators trying to prove that too

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big to fail still doesn't exist. And and they're way

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to prove that is to say look if you get too big and in your

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proven you keep making mistakes and you know, we talked to speech

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about what are the signs of mistakes and one of those is just you don't

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you sort of keep assuming it's One Bad Apple as opposed

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to a systemic problem in your own organization. And that's

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he's clearly talking about times when examiners are seeing,

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you know, the bank on covers a problem and they think well, that's

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just this unit or that's just this person or you

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know, I mean Wells Fargo famously in the phony accounts situation

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just said how many bad apples was it was

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like thousands of employees that they considered bad apples and

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that didn't pass the smell test. But the point was

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the organization had that initial reaction of well.

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This is just a one-off thing and this is not a

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Is not a bigger issue and he's saying that that's a real

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problem and at that level that it reaches that problem. We see that you're

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not taking seriously enough management could go and yes

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down the line if management don't you know for whatever

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reason that's not take care of the problem. We could divest you too. But I

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think it's I think the two issues too big to manage too big

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to fail.

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Are linked in a way that's it's gonna be very difficult to

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pull apart.

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Before I wrap things up here anything else that's stuck

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out from the speech that you think is knows worthy and

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people should in the industry should know about well, I did think.

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You know when I was reading the speech and and saw

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it delivered I did think well. Wow people

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like Senator Warren are going to be really pleased because you

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know, he's taking this issue seriously and moving

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the ball down the field and and I thought he would not that

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you know, she would be throwing him a ticker tape

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parade. I never thought that but but that she would be at least

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pleased directionally, but I gotta say he got he got

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zero credit. I mean she was tweeting out an implicit criticism.

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She was like, this is

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I'm not sure it was implicit. It was explicit she tweeted out immediately.

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You know, what his past time.

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For you to act it's past time for the OCC to

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act and you know, there's a bigger Dynamic here of

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you know, he's acting comptroller and and the the president

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has not nominated a full-time comptroller and we don't know that he will certainly doesn't

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have to acting comptrollers can stay there as

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long as the administration wants but if if

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there was some idea that that doing this, you know

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progressives have have viewed acting controllers.

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Sue a little skeptically I think because he comes

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from the fed and and and that like there was

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no sense that that had softened and and as much as

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I saw a lot of these consumer groups these reform Advocates,

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you know in a way saying good things

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about the speech they were always following it up with. Yeah, but

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you didn't do it you didn't do it in the case of wells and Senator

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Warren wants to want something

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to happen with City too. And and that's that's what

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stuck out to me. Just this way of that, you

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know here he's giving a speech. He's in theory moving

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the OCC more the

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Way that progressives have wanted Bank regulation to be

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seen and that's definitely they're not even seeing that as

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moving the ball down the court. They just view it as more of

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the same. And and so it's just a really interesting Dynamic

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to play out. When when you see a speech

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like that. That's as big as it is. And it's it's well written speech I

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encourage people to read it whether you believe it or don't believe

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it. It's really well thought out but it still

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doesn't change as much as people thinking it's gonna

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get these headlines and then the headlines recede and

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and what's changed and people don't aren't sure that much has

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Rob thanks a lot for for your comments. I'll tell you what. I'm

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really taken away from this that I hadn't thought of before is that

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I think you're making some great points that maybe to

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a large extent maybe not that's where total extent but, you know,

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there's some large extent Sue's comments were just about

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as much as about positioning and taking

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a stance towards Warren and

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and internal Washington as it was really

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to the banking industry, and I hadn't really thought of it

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in that light. So thanks for enlightening me

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on it. I hope everybody listening feels as enlightened as

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I do. Thanks a lot for being on what's going on in banking and everybody

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listening in. I hope you enjoyed Rob's comments

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on Sue's comments about breaking up the big

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Banks. I hope you can always find us on your favorite podcast

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platform, and I hope you'll subscribe to

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what's going on in banking. Thanks.